Near-Term ISL Uranium Producer Trading at Fraction of Peers

RI can take credit for discovering a number of high-quality uranium players which have subsequently found favour with the broader market and moved substantially higher, particular in the last thee or four months. While one might fairly argue that just about every uranium story has done well in the market, a little bit of fundamental analysis quickly reveals that there are indeed precious few that can support their current valuations, let alone increased valuations.

Since being able to sleep at night is still something which most of our readers probably value, we have come across another superior near production (for uranium) story, which, even relative to its few other quality peers still looks poised to deliver significant upside.

Powertech Uranium [TSXv:PWE] which closed today at C$3.66 per share, joins the ranks of Energy Fuels [TSXv:EFR] and Forsys Metals [TSX:FSY], the two other main near production uranium names that we have had success with, both of which we consider to be takeover targets, sooner rather than later.

Powertech Uranium is a name that stands out because of its seasoned and proven management team, in fact, its chairman has actually been inducted into the Uranium Hall of Fame (who knew it existed!). The company is focused on ISL production in the U.S., and has historical resources in excess of 17 million pounds of uranium.

Peer Valuations

Other ISL uranium near-producers focusing on U.S. properties include Energy Metals [TSX:EMC] with a market capitalization of over C$1 billion, Ur-Energy [TSX:URE] with a C$375 million market cap and Uranium Resources [OTCBB:URRE] with a valuation, which in Canadian dollar terms equates to about C$270 million.

Powertech compares very favourably here with a market capitalization of just C$153 million at current prices.

People

The people are the key here. Bios can be found here. Investors need to realize that there are probably less than 10 Canadian listed uranium companies with the ability to actually bring a mine into production. PWE is one of them, and should command a premium for that reason.

Cash Flow

The company will need some more money, and we think that using 65 million shares fully diluted is a fair number to account for dilution (current outstanding 42 million / fully diluted 53 million shares).

Because PWE has projects located in different states, permitting issues in one state will be offset by timely permitting in another - they are all being pursued simultaneously.

On the whole, we think that the company can produce at an annualized rate of 750,000 pounds in 2009, and 1.5 million pounds of uranium per year, starting in 2010. ISL costs will be between $20 and $25 per pound.

On the low side, and at current uranium prices of $75 per pound, PWE would cash flow $82 million on the 2010 production numbers, or roughly C$1.25 per share. Given multiples of 15X to 20X which are currently being achieved by producing names in the sector, we think that Powertech could well be a C$20-C$25 stock in 3-4 years time.

What this does not take into account is the possibility of accretive acquisitions, which could increase pounds in the ground, and eventually, production numbers. We feel very strongly that PWE, with its seasoned management team, will find new ISL projects that they can bring into the fold - this can only be positive.

Conclusion

Given where peers are trading, we believe that PWE should be a C$5-C$6 stock right now as the market learns the story and gets more clarity on production timelines, and develops an appreciation for this company’s proven ability to move towards production with its experienced personnel.

click here for view grafik report.

This story will get out as investors look for the next cheap near-term producer to load up on, and PWE is one of the very few listed companies with the ability to put a uranium mine into production. We can’t stress this point enough, and we only talk about near-productions stories that have this ability – there aren’t many others listed.

Therefore, relative to peer valuations, we see PWE as a C$5-C$6 stock soon, and potentially a C$20-C$25 stock in 3 or 4 years, assuming uranium prices go sideways.

If uranium runs over $100 (and rumour today from several sources is that we are now $85/lb), cash flows will expand, and multiples will expand, leading to an even more substantial return.

source news : resourceinvestor.com